Debt is usually the cheapest source of long-term finance for a profitable company. The most important reason is that:

Correct answer: D) Interest is a tax-deductible expense and debt holders face lower risk than equity holders, so they accept a lower return

Explanation

Debt holders have a prior, contractual claim on income and assets, so they bear less risk and accept a lower return. Interest is also allowed as a deduction for tax, which reduces the effective cost further. Debt must be repaid, interest is a contractual obligation rather than discretionary, and debt holders do not normally vote.